Page 2 of 3 CHINA AND THE GLOBAL CRISIS Denial as the storm gathered
By Henry C K Liu
attending the summit agreed on anything besides agreeing to meet. Attendance
cannot be misrepresented as supportive of biased US views. The fact is that
many in the world think that the idea of a global savings glut is a myth. The
US is receiving a large capital account surplus only because of dollar
hegemony, a geopolitically constructed peculiarity through which critical
commodities, the most notable being oil, are denominated in fiat dollars, not
backed by gold or other species since president Richard Nixon took the dollar
off gold in 1971. This financial crisis is US-sourced and has spread to the
rest of the world.
The recycling of petro-dollars into other dollar assets is the price
the US has extracted from oil-producing countries for US tolerance for the
oil-exporting cartel, the Organization of Petroleum Exporting Countries, since
1973. Since then, everyone accepts dollars because dollars can buy oil, and
every economy needs oil. Dollar hegemony separates the trade value of every
currency from direct connection to the productivity of the issuing economy to
link it directly to the size of dollar reserves held by the issuing central
bank.
These dollar reserves held by foreign central banks by definition must be
reinvested in dollar assets. Dollar hegemony enables the US to own, indirectly
but essentially, the entire global economy by requiring its wealth to be
denominated in fiat dollars that the US can print at will with little monetary
penalty. Much of the world is suffering from a shortage of capital while
non-dollar economies are prevented from financing their domestic development
with sovereign credit and have to rely excessively on exports for dollars.
There is no savings glut, only a dollar glut released by a wayward US central
bank addicted to monetary laxative.
World trade is now a game in which the US produces at will fiat dollars of
uncertain exchange value and zero intrinsic value, and the rest of the world
produces goods and services that fiat dollars can buy at "market prices" quoted
in dollars.
Blaming the victims for the crime
President Bush continued with his self-absolving explanation of the global
financial crisis:
The massive inflow of foreign capital, combined with
low interest rates, produced a period of easy credit. And that easy credit
especially affected the housing market. Flush with cash, many lenders issued
mortgages and many borrowers could not afford them. Financial institutions then
purchased these loans, packaged them together, and converted them into complex
securities designed to yield large returns. These securities were then
purchased by investors and financial institutions in the United States and
Europe and elsewhere - often with little analysis of their true underlying
value.
The financial crisis was ignited when booming housing markets began to decline.
As home values dropped, many borrowers defaulted on their mortgages, and
institutions holding securities backed by those mortgages suffered serious
losses. Because of outdated regulatory structures and poor risk management
practices, many financial institutions in America and Europe were too highly
leveraged. When capital ran short, many faced severe financial jeopardy. This
led to high-profile failures of financial institutions in America and Europe,
led to contractions and widespread anxiety - all of which contributed to sharp
declines in the equity markets.
These developments have placed a heavy burden on hardworking people around the
world. Stock market drops have eroded the value of retirement accounts and
pension funds. The tightening of credit has made it harder for families to
borrow money for cars or home improvements or education of the children.
Businesses have found it harder to get loans to expand their operations and
create jobs. Many nations have suffered job losses, and have serious concerns
about the worsening economy. Developing nations have been hit hard as nervous
investors have withdrawn their capital.
Notwithstanding Bush's
attempt to blame the victims for the crime, the easy credit was not caused by
massive inflow of foreign capital. It was the other way around.
The massive inflow of foreign-owned capital denominated in dollars was caused
by easy credit that grew out of monetary indulgence on the part of the US
central bank, which alone can issue dollars. This monetary indulgence enabled
the US to sustain a current account deficit with a capital account surplus of
recycled dollars.
The US has been consuming more that it produces through recurring trade and
fiscal deficits made possible by dollar hegemony, sucking up wealth form its
trade partners who are not in any position to increase domestic consumption
because real wealth has been exported to the US in return for fiat dollars that
cannot be used in the domestic economy without causing inflation.
The reason homeowners defaulted on their mortgages en mass was not merely
because home prices dropped, but because these mortgages were made on inflated
home prices pushed up by the debt bubble to levels way above what could
reasonably be supported by owner income. This is known generally as subprime
lending. This was the problem of income disparity created by neoliberal free
trade, which depressed wages in all economies around the world through
cross-border wage arbitrage. Sublime lending also permitted no-down-payment
mortgages, which gave borrowers an incentive to default when home prices fell
below the value of the outstanding mortgage.
President Bush said with a straight face about his ideological surrender:
We
are faced with the prospect of a global meltdown. And so we've responded with
bold measures. I'm a market-oriented guy, but not when I'm faced with the
prospect of a global meltdown. At Saturday's [November 15] summit, we're going
to review the effectiveness of our actions.
Here in the United States, we have taken unprecedented steps to boost
liquidity, recapitalize financial institutions, guarantee most new debt issued
by insured banks, and prevent the disorderly collapse of large, interconnected
enterprises. These were historic actions taken necessary to make - necessary so
that the economy would not melt down and affect millions of our fellow
citizens.
The "market-oriented guy" is forced to temporarily
change his orientation toward massive government intervention in the market
until the prospect of a global meltdown is averted. Since August 2007, the
"unprecedented steps" the US has taken have so far failed to stabilize market
seizure, price volatility and loss of confidence. Equity market value has
fallen over 50%. Major financial institutions had to be nationalized or allowed
to go bankrupt. Financial sectors in all market economies are moving closer
toward total collapse by the day.
Once the floodgate of government intervention is open, the ailing US auto
sector, in steady decline for several decades, takes advantage of the financial
crisis to clamor for government bailout, demanded to be treated on par with
distressed financial institutions in their access to more easy money from the
government, on the basis of "too big to fail". Besides the auto sector, every
other sector of the economy is waiting in line for federal government help, as
are state and local governments.
Market capitalism continues to fail
Market capitalism is failing in every respect and in every corner of the
economy even after the US pumped trillions of liquidity into the financial
system, both by creating more fiat money and taking on more sovereign debt.
Unemployment in the US has reached above 10 million and still rising; with
large firms announcing plans to each lay off ten of thousands more.
The Federal government is reportedly prepared to provide more than $7.76
trillion, about half of current US annual GDP, which US taxpayers must repay in
the future, to keep badly managed institutions form failing. The latest measure
announced was to guarantee $306 billion of Citigroup debt.
Total US debt, defined as the sum of all recognized debt of federal, state and
local governments, international, private households, business and domestic
financial sectors, including federal debt to trust funds - but excluding the
huge contingent liabilities of social security, government pensions, Medicare
and other government off-budget items - stands at $53 trillion in November 30,
2008.
According to the Bank of International Settlement, the total outstanding
notional amount of over-the-counter derivative contracts was $683.7 trillion as
of June 2008, with gross market value of $20.4 trillion. Of this total notional
amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9%
are foreign exchange contracts, 2% are commodity contracts, 1% are equity
contracts, and 12% are other.
OTC derivatives are largely subject to counterparty risk, as the validity of a
contract depends on the counterparty solvency and operational ability to honor
its obligations. Against this volume of exposure, $7 trillion is additional
obligation if interest rates were to shift 1% on a notional value of $700
trillion.
As of November 26, 2008, the US has committed or expended, without the benefit
of an overall strategy, lurching from emergency to emergency, the following
public funds to rescue with little success the collapsing finance sector: From the Federal Reserve: (TAF) Term Auction Credit - $900
billion allocated; $415.3 billion expended.
Discount Window Lending - $140 billion
Banks (other loans primary credit) - $93 billion
Investment Banks (other loans primary dealer and other broker-dealer credit) -
$47 billion
Loans to buy ABCP (other loans asset-backed commercial paper money market
mutual fund liquidity facility) - $66 billion
AIG (allocated minus Treasury's $40 billion) - $112.5 billion; $87.4 billion
expended
Bear Stearns (initial loan to support JPMorgan takeover) - $29.5 billion; $27
billion expended
(TSLF) Term Securities Lending Facility - $225 billion; $200.5 billion expended
Swap Lines (dollars provided by Federal Reserve to foreign central banks) -
$602 billion (MMIFF) Money Market Investor Funding Facility - $540 billion
(CPFF) Commercial Paper Funding Facility *upper limit from Reuters - $1.8
trillion; $271 billion expended
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
